MicroCapital Monitor APRIL 2009 | VOLUME.4 ISSUE.4 THE NEWSPAPER

MICROCAPITAL BRIEFS | TOP STORIES

BlueOrchard Reports 4 to 8% Returns for 2008 INSIDE Page Initial financial results from BlueOrchard indicate the firm reached USD 870 million in total assets under management during 2008, of which USD 670 million was invested in MicroCapital Briefs 2 microfinance institutions. Each of the funds managed by BlueOrchard returned between 4 Microfinance news and 8 percent during the year. BlueOrchard’s strategy is to acquire minority stakes and assume an active governance role in MFIs worldwide. April 6. 2009 Pioneers in Microfinance 9 Early innovators ’s Bandhan Sells $35m in Loans to Commercial Banks Bandhan, an Indian microfinance institution, has sold the equivalent of USD 35.4 million in Thank You to… 10 farm loans to the following domestic commercial banks: IndusInd Bank (USD 14.8 million), (USD 11.8 million), Development Credit Bank (USD 4.9 million) and Our top supporters (USD 3.9 million). Such moves allow Bandhan to avoid international lenders that have been more heavily impacted by the global credit crunch. The transactions Market Indicators 11 also help both parties meet government-imposed thresholds: Bandhan improves its capital Courtesy of the MIX adequacy ratio, and banks raise their agricultural lending ratios. As of March 2008, Bandhan reported 900,000 borrowers, a gross loan portfolio of USD 82.4 million, total assets of USD Upcoming Events 12 102.4 million, a debt-equity ratio of 11.16 percent, return on equity of 62.44 percent and Industry conferences return on assets of 5.06 percent. April 6. 2009 Paper Wrap-ups 13 Indian MFIs Raise $38m Assigning Loans to Latest research and reports YES recently concluded the following group of transactions valued at a total of USD 38.3 million: (1) a USD 17.2 million rated loan assignment originated by SKS Monitor Subscriptions 16 Microfinance Private Limited, (2) USD 10 million in rated non-convertible debentures and commercial paper issued by SKS, (3) a USD 8.6 million rated loan assignment by Share Support our emerging industry by Microfin Limited and (4) USD 2.5 million in rated senior tranche pass-through certificates subscribing, renewing or upgrading backed by Equitas Microfinance India loans. The four transactions together cover loans made to roughly 400,000 microborrowers. March 24 and April 6. 2009

Amid Mass Rejections, Bangladesh Extends Licensing Deadline The Microcredit Regulatory Agency of Bangladesh has announced that the deadline for microfinance institutions to attain licenses has been extended from June until December. Out EASTERN EUROPE AND of 4,240 applications submitted so far, 1,000 have been processed, and 60 percent of those CENTRAL ASIA have been rejected. March 30. 2009 MFI MARKET SHARE TRENDING 2005 TO 2007 BY MFI SIZE (NUMBER OF ACTIVE BORROWERS) Mexican Bank Closing Microfinance Arm After Loss of $8.4m The Wall Street Journal has reported that Grupo Financiero Banorte SAB, a major Mexican bank, is closing its microfinance division Creditos Pronegocio after it suffered losses of USD 8.4 million during 2008. Nonetheless, Mexican microlenders Financiera Independencia SAB and Banco Compartamos SA expect their loan books to grow between 10 and 25 percent during 2009, much more than the Association of Mexican Banks general banking forecast of 6 to 8 percent growth. March 26. 2009

Nigeria to Prosecute Microcredit Loan Defaulters in Anambra Nigeria’s Anambra State has moved to prosecute farmers who have defaulted on the repayment of microcredit loans. In 2008 Anambra State loaned the equivalent of USD 1 million to some 2,339 farmers. Sam Okiwe, Secretary of Nigeria’s Ministry of Agriculture, reportedly has said that some of the farmers who benefited from the loans are deliberately refusing to pay the government back and that - at the request of Anambra government - “We have sent the names of the first batch of defaulting farmers to the Ministry of Justice for necessary action with regards to their prosecution.” March 24. 2009 MARKET INDICATORS PAGE 11 This report available by SUBSCRIPTION ONLY: Support this emerging industry by subscribing and advertising via www.MicroCapital.org Page 1 MICROCAPITAL MONITOR | MICROCAPITAL.ORG APRIL 2009 | VOLUME.4 ISSUE.4

MICROCAPITAL BRIEFS CGAP and WIZZIT Offer Branchless Banking in Rural South Africa CGAP (Consultative Group to Assist the Poor) has announced that it India's Grama Vidiyal, Madura Report Credit Growth will collaborate with WIZZIT to use mobile technology to provide For the year ending March 2009, Indian MFIs Grama Vidiyal and branchless banking services to poor people in rural South Africa. The Madura Microfinance reported significant credit growth, in part because effort involves: (1) a mobile banking payment service for wholesalers commercial Indian banks eased credit at the close of the year in order to serving more than 500 small “spaza” shops in the township of meet government-required agricultural lending targets. Grama Vidiyal’s Motherwell and (2) an “easy” account opening effort distributed via disbursements grew 81.2 percent to USD 74.6 million, and Madura’s direct sales, the postal service and Dunn’s, a major clothing retailer, grew 33 percent to USD 25.3 million. Grama Vidiyal CEO Arjun which will also test a preferred pricing scheme for participants. CGAP is Muralidharan said, “We faced a credit crunch during the [third quarter] a think tank housed at the World Bank. WIZZIT, a division of the South of fiscal 2009 because banks tightened their lending. But towards the end African Bank of Athens Ltd, offers cell-phone-based banking that of the year, banks eased credit in order to meet their priority sector operates across cell networks, SIM card types and cell phone models. targets and now things are normal.” Grama Vidiyal reports 224,108 April 8. 2009 active borrowers, a gross loan portfolio of USD 28.9 million, total assets of USD 30.8 million, a debt-equity ratio of 5.45, return on assets of 1.63 Uganda Tries to Make SACCOs Safe percent and return on equity of 15.3 percent. Madura has 182 branches Microfinance Minister Ruth Nankabirwa of Uganda has announced that and disbursed loans of USD 35 million in fiscal 2007. April 10. 2009 there will be greater regulation of Savings and Credit Co-operative Organizations (SACCOs) in order to protect depositors. Certain Adding Branches in War-torn Sri Lanka Ugandan microfinance institutions have reportedly made a habit of The chairman of Sri Lanka’s Bank of Ceylon Dr Gamini operating for a few months in a particular region and then relocating Wickramasinghe has announced that the bank will open several more along with depositors’ savings. April 7. 2009 branches in the Northern and Eastern Provinces of the country, anticipating that high demand for services will follow the violence that Colombia’s Grupo Aval Ponders Microcredit may be ending there. In addition to traditional branches, the bank will Grupo Aval SA of Columbia has announced that it will offer add 11 mobile units, nine automatic teller machines in the North and microlending services targeting the poorest sectors of the economy. seven in the East. With 305 local and three overseas branches, While details remain scarce, a joint venture with of government-owned Bank of Ceylon reported total assets of USD 3.8 Bangladesh has been raised as a possibility. April 7. 2009 billion for 2007, gross loans of USD 2.5 billion, return on assets of 1.11 percent before tax and return on equity of 14.59 percent after tax. Zimbabwe Microfinance Association Calls for Funding April 9. 2009 Mandas Marikanda, Board Chair of the Zimabawe Association of Microfinance Institutions, is encouraging its members to revisit their MicroPlace Offers 6% on Nicaragua Fund operational and financing strategies to grow the country’s microfinance MicroPlace is offering up to 6 percent annual returns on minimum sector. In particular Ms Marikanda stressed the need to identify investments of USD 20. Funds invested in eBay’s MicroPlace are passed appropriate options for recapitalization, such as the association’s efforts to other entities - in this case Working Capital for Community Needs to establish a donor-financed fund. Struggling with hyperinflation, (WCCN). Nonprofit WCCN, formerly the Wisconsin Coordinating microfinance institutions are often unable maintain the required Council on Nicaragua, is raising the money for its Nicaraguan Credit minimum capital of USD 5000. Even before this capital requirement Alternatives Fund, which holds USD 8 million in loans outstanding to 15 took effect in August 2008, only 150 MFIs were operating out of 309 partner microfinance institutions. April 9. 2009 registered institutions. April 6. 2009

BURO Bangladesh to Raise $14m in Syndicated Loans Microfinance institution BURO Bangladesh has announced that it will raise the equivalent of USD 14.52 million through syndicated loans CORRECTION arranged by Citibank NA. The five-year loan agreement stipulates an The March 2009 issue of this newspaper referred to Pro Mujer as interest rate of 15 percent for the first six months with a floating rate “affiliated with five microfinance institutions in Latin America.” In fact linked to government treasuries thereafter. Funders include Citibank Pro Mujer is a single nonprofit with operations in five Latin American NA, Sonali Bank, Agrani Bank, Pubali Bank, Mutual Trust Bank, countries. Southeast Bank, United Commercial Bank, National Bank, Dhaka Bank and Eastern Bank. The commitment of 30 percent of the proceeds to the MicroCapital Monitor - © 2009 MicroCapital - ISSN 1935-505X agricultural sector stems from a recent push by the central bank to The MicroCapital Monitor is published monthly by MicroCapital encourage agricultural credit. With 393 branches across Bangladesh, Editor David Satterthwaite BURO had a gross loan portfolio of USD 45.4 million and 496,000 Director of Operations Bob Summers active borrowers as of December 2008. April 8. 2009 Writers Laura Anderson, Andrea Chu, Ryan Hogarth, Bharathi Ram and Zoran Stanisljevic Does “More Commercialized” Equal “Less Resilient”? Special thanks to Diego Guerra Tavara, In a recent Radio Australia interview, Jamie Bedson of the Banking Sophia Kittler and Melissa Alvarez With the Poor Network argued that, although, “the fundamentals [of For questions, comments or suggestions, please write to microfinance] are safe,” the recession could have a major impact on [email protected] or call +1 617 648 0043, Boston, USA some microfinance institutions: “[During] the financial crisis in 1997, a lot of microfinance institutions survived; they came out of that strongly MicroCapital would like to recognize the individuals at CGAP, the Microfinance because they were not integrating into the global financial system to the Information Exchange (MIX) and the Microfinance Gateway for their outstanding same degree. However in the last few years, the microfinance industry work disseminating information on microfinance. Thank you! [has] commercialized….” April 8. 2009 This report available by SUBSCRIPTION ONLY: Support this emerging industry by subscribing and advertising via www.MicroCapital.org Page 2 MICROCAPITAL MONITOR | MICROCAPITAL.ORG APRIL 2009 | VOLUME.4 ISSUE.4

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Yunus Touts Deposits in Lieu of Foreign Currency Grama Vidiyal, Madura, SKS to Offer Home Loans in India Nobel laureate Muhammad Yunus warned at a recent conference in Indian microfinance institutions Grama Vidiyal, Madura Micro Finance India that, “[F]oreign money is not a great idea at all…. [T]he best and SKS Microfinance will all reportedly begin offering home loans to solution is to create yourself into a bank, taking deposits and lending existing rural borrowers with good repayment records. Loan sizes are money.” A series of papers by CGAP (Consultative Group to Assist the expected to range from the equivalent of USD 985 to USD 3900, repaid Poor) published in 2006 found that, over seven years, the deposit-taking in equal monthly installments, sometimes with a four-month repayment MFIs that were studied experienced massive growth, strong profitability holiday during construction. April 2. 2009 and improved efficiency. Mr Yunus also spoke in favor of India establishing a microfinance-specific banking law, such as the one Cambodian MFIs Foresee Defaults Surpassing 1% in 2009 currently before the Indian Parliament. April 6. 2009 Cambodian microfinance institutions (MFIs) are predicting that non- performing loan (NPL) rates will rise significantly this year. Prasac MFI Applying the Principles of Group Lending to Bank Bailouts Ltd and Amret have already reported upticks, with Amret General Jamie Zimmerman, Deputy Director of the Global Assets Project, Manager Chea Phallarin stating, “Last year, NPLs were only 0.06 argued recently in the weekly Christian Science Monitor that, “A system of percent out of the USD 54 million in total lending - but since the start of peer pressure, like the one commonly used in microfinance, in which an the year, the NPL rate has increased sharply to around 1 percent…. For individual’s success depends on the responsible behavior of the overall the whole year, it is forecast at 1.2 percent.” (While Amret and Prasac group, could prove useful for the global financial system. Had such both reported eyebrow-raising NPL rates of under 0.3 percent in 2008, a interdependence existed earlier, the financial community might have 2006 CGAP competition measuring transparency in MFIs worldwide prevented a few bad actors from poisoning the well with exotic found excellent results for these and other Cambodian MFIs.) instruments and ludicrous leverage.” April 6. 2009 April 1. 2009 Mobile Banking Sluggish in Latin America The mature state of the microfinance industry in Latin America should Microfinance Leaders Endorse Principles of Client Protection provide a strong platform for mobile banking to reach people in rural The Campaign for Client Protection in Microfinance, which was areas, according to a report from Inter-American Development Bank announced in the November 2008 issue of this newspaper, recently held (IDB) and Spain’s Fundación Telefónica. Despite relatively high usage of the initial meeting of its steering committee to develop implementation mobile phones in Latin America, m-banking has grown slowly in the plans. Please support this critical effort by endorsing the campaign at region, relative to Africa and Asia. Upon releasing the report, IDB also http://www.campaignforclientprotection.org/. April 1. 2009 announced the completion of a pilot program with the Federation of Colombian Coffee Growers that will eventually allow 300,000 growers to use mobile phones to make payments, withdraw money from commercial establishments and check coffee prices. April 3. 2009

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Ghana to Investigate Disbursement of Loans to Rural Women IFC Cuts Peru Allocation But Increases Microfinance Funding The Ministry of Women’s and Children’s Affairs in Ghana will be International Finance Corporation (IFC) has announced a new strategy launching an investigation into Micro-finance and Small Loans Centre of investment in Peru, where it will cut investments to USD 100 million (MASLOC), the country’s microfinance agency. Women’s and in the 2009 fiscal year from 360 million in 2008. Instead of investing in Children’s Affairs Minister Akua Sena Dansua reportedly has stated that big projects, IFC plans focus on companies that generate more jobs and women in the Eastern Region have yet to be given access to funds that reach the poorest sectors of the economy. This will include increased were allocated six years ago. Ms Dansua added that other women who support of microfinance institutions. March 30. 2009 were “not supposed to benefit from the scheme” were granted loans, resulting in a high default rate. While data on defaults is scarce, one Nigeria’s Kaduna State Pushing Microfinance 2006 report pegged repayment at 60 percent. MASLOC was introduced In the Kaduna State of Nigeria, 18 community banks have recently in 2004 as part of a poverty reduction strategy laid out by the converted to microfinance banks and 23 microfinance banks have been government of Ghana and the World Bank. April 1. 2009 given approval to operate. The Central Bank of Nigeria (CBN) and Kaduna State have also arranged a deal whereby four banks will loan Aid Questioned, Microfinance Praised USD 5.4 million to local farmers. Of this amount, approximately USD American television host Charlie Rose recently interviewed Dambisa 1.35 million will come from the state, an equal amount will come from Moyo of Cambridge University and Jacqueline Novogratz, founder and the farmers and the CBN will guarantee 75 percent of the remainder, CEO of Acumen Fund. Ms Moyo argued that traditional aid to poor thereby limiting the banks’ exposure to 12.5 percent of the total. countries fosters a “culture of dependency and bureaucracy,” whereas March 30. 2009 increased promotion of entrepreneurship could bring efficiency and sustainability. March 30 and March 31. 2009 Informal Recyclers in Brazil Organize, Receive Microloans In Brazil, “catadores” (informal recyclers) often sell material to Gates Grants $4.7m to Grameen Foundation for Health, Farm Data middlemen rather than recycling depots - which pay higher prices - in US-based Grameen Foundation has received two grants totaling USD order to get paid more quickly and to avoid having to accumulate and 4.7 million from the Bill & Melinda Gates Foundation to support transport large quantities of material. To overcome this obstacle, technology initiatives aimed at improving healthcare delivery in Ghana catadores sometimes join cooperatives that handle storage and and providing information services to poor rural farmers in Uganda. transportation to the depots, thus earning a higher rate. The The Ghana effort will support the development of mobile applications Participatory Sustainable Waste Management project has been using such as one that will allow nurses to collect and transmit data using donated funds to help cooperatives extend loans to the catadores, whose mobile phones. The Uganda grant will help build a network of repayment schedules are tied to the oft-delayed payments from the individuals in rural communities who will use mobile phones to collect depots. March 27. 2009 information about community needs, to disseminate agricultural information to farmers and to link them to markets. March 30. 2009

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How social are you? MicroFinanza Rating: the best partner for social and credit rating

[email protected] www.microfinanzarating.com

? Milan Quito Managua Nairobi Bishkek

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MIX, Social Performance Task Force Standardizing Indicators Cranes to Design Software for India’s L & T Finance As part of ongoing efforts to standardize the measurement of social Cranes Software International has won a contract from L & T Finance, performance in microfinance, the Microfinance Information Exchange, a division of Indian conglomerate Larsen & Toubro, to implement its in collaboration with the Social Performance Task Force, has sent a microfinance lending solution, Banker’s Realm (BR.net). The web-based questionnaire to 1,300 microfinance institutions (MFIs). We at software will be implemented over the next three months at 20 branches MicroCapital applaud this important effort and encourage MFIs to of L & T Finance, which is active in agri-loans. Cranes has 350,000 participate. March 27. 2009 users worldwide and counts among its customers Equitas Microfinance, Nirman Bharati, Indian Association for Savings and Credit and Rores Nigeria’s Royal Exchange Gets Approval for Microfinance Bank Foundation. March 24. 2009 Royal Exchange Plc, a Nigerian insurance company, has reportedly received approval from the Central Bank of Nigeria to operate a PlaNet, Pfizer Study Microinsurance in China microfinance bank that is slated to begin operations in the next few Pharmaceutical giant Pfizer and microfinance nonprofit PlaNet Finance months. As of March 25, 2009, Royal Exchange had a market have announced that they will collaborate on a study of the healthcare capitalization of approximately USD 50 million. March 26. 2009 needs of low-income households in China. March 23. 2009

Islamic Microfinance Touted to Fight Poverty in Nigeria Nigeria Plans $1.35b Agricultural Fund Economist Malam Ahmad Dogara recently argued before the Micro- Tunde Lemo of the Central Bank of Nigeria recently announced the Finance Investors Forum in Kano, Nigeria, that Islamic microfinance approval of plans to establish a fund that would disburse the equivalent could be an excellent substitute for conventional microfinance, which of USD 1.35 billion through commercial banks to farmers at an interest has been rejected in some Muslim communities, principally for its non- rate of nine percent. March 23. 2009 compliance with Islamic law. Approximately 67 million Nigerians are Muslim. March 25. 2009 IBD Sees Microfinance Up, Remittances Down in Latin America The Inter-American Development Bank (IBD) predicts 2009 will be the Kiva Plans to Raise Funds for US Microlenders first year that remittances to Latin America and the Caribbean will Microfinance intermediary Kiva, which has routed USD 65 million decline after a decade of growth. During 2007, total remittances - which from small investors to developing-world microfinance institutions, is expatriates send home from abroad - to Latin America were estimated at closing in on deals to raise money for multiple unnamed microfinance USD 66.5 billion. As early as March 2008, the IDB reported that partners in the US. Stateside entrepreneurs will be able to seek up to remittances to Brazil fell by four percent. March 23. 2009 USD 10,000, considerably more than the USD 1,200 limit in developing countries. March 25. 2009 Fitch Rates Uzbekistan Microcreditbank at B- Fitch Ratings has assigned a long-term issuer default rating of B minus, Prognosis Poor for Micro Health Insurance with a stable outlook, to government-controlled Microcreditbank of International business school INSEAD (Institut Européen Uzbekistan, reflecting the likelihood of government support should the D’Administration des Affaires) recently published an article exploring bank come under stress. The bank offers loans at rates from 5 to 14 the sustainability of health microinsurance. The article argues that no percent and operates 79 full-services branches and 270 mini-banks that model has yet emerged for unsubsidized health microinsurance. Mayte serve 60,000 borrowers and 170,000 savers. Microcreditbank reports a Oosterveld, Director of the PharmAccess Foundation, says that one of gross loan portfolio of USD 113.1 million. March 23. 2009 !!! the difficulties is that the concept is unappealing to poor people, who often wonder why they would pay in advance for services they may never need from a clinic that may no longer be there when they need it. March 25. 2009

CGAP Reviews Local Microfinance Wholesale Facilities A recent CGAP (Consultative Group to Assist the Poor) study reveals that over USD 2 billion is channeled to microfinance each year through 47 (of at least 76 existing) local wholesale facilities, which are often called apex funds. These facilities are established in developing countries to pool national government and international donor money to provide loans or grants to microfinance institutions (MFIs). “In most cases, wholesale funds were originally designed as a temporary funding mechanism,” says CGAP’s Eric Duflos. “[P]roblems come when they use highly subsidized loans and compete with commercial sources of funding as the market matures. Those…are missing an opportunity to help take microfinance in their country to the next stage.” March 24. 2009

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PIONEERS IN MICROFINANCE This series recognizing early innovators in social finance is generously underwritten by: Stuart Rutherford founded SafeSave, a microfinance institution in Bangladesh.

Stuart Rutherford management services (as opposed to just microcredit) to poor slum dwellers in Dhaka. MicroCapital: What in your upbringing or background sparked your passion for MC: What do you consider your most important achievement? social finance? SR: The thing that gives me greatest satisfaction is having helped to SR: Pure chance. In 1974 I happened to be in Nicaragua, working for a draw the attention of the microfinance world to the importance of every research outfit in Managua that was looking into the prospects for day money-management services for poor people. recovery from the devastating earthquake that had destroyed the city. At the time I was a trainee architect, and my job was to find out what happened to the housing of poor people during and after the If I were a youngster starting out, I would earthquake. That took me into very low-income housing areas in a developing country for the first time in my life. In the course of finding try to do enough reading to get my head out how people had coped in the earthquake, I listened to their accounts of how they managed their money. I started hearing about around what is going on in microfinance moneylenders and money guards and savings clubs. I suddenly realised and then tramp around a few slums and that being poor sharpens, rather than reduces, your need for financial services, since with so little money in your pocket you need to save up or villages to see for myself how borrow in order to afford even small expenditures. Subsequently, as microfinance relates - or fails to relate - to various jobs took me to other developing countries, I followed up on my hobby and began a “collection” of the types of money management the financial realities of life in poor services and devices that are used by the poor. As time went on I began to notice patterns that recur all around the world. All this was before communities. modern microfinance got under way, so you can imagine how interested I was when, in 1983, I first heard about Grameen Bank and Village MC: If you were starting out now, where would you begin? Banks and so on. I felt I was beginning to understand poor people's attitudes to money, and so I was very keen to find out what they would SR: If I were a youngster starting out, I would try to do enough reading make of these new institutions that were beginning to work with them. I to get my head around what is going on in microfinance and then tramp took a job with the UK NGO ActionAid that took me to Bangladesh in around a few slums and villages to see for myself how microfinance 1984, and from then on financial services for the poor - microfinance as relates - or fails to relate - to the financial realities of life in poor it later came to be called - became an ever stronger interest. communities. For myself, I would carry on as I am - trying to imagine better and better ways of helping poor people manage their money. MC: What provided the initial linchpin for your microfinance work? Right now, for example, I’m working on a product that offers zero- SR: Grameen Bank turned me from being just an observer into wanting interest loans to poor people willing to commit to saving a proportion of to become a practitioner and innovator in financial services for the poor. each loan. Poor people know that saving can be a better way of I can still remember the excitement I felt when I went for the first time managing financial needs than borrowing, but they fail to save because to see a Grameen Bank meeting in central Bangladesh late in 1984. I of a lack of reliable partners and, above all, because of a lack of liquidity: went to see Muhammad Yunus and told him I wanted to modify his somehow spending always seems to trump saving, no matter how well- approach by placing a greater emphasis on saving, and I wanted to try it intentioned you are. This trial product sets out to solve this problem in out in the dense slums of the capital, Dhaka. He was not optimistic but the most simple way: by providing liquidity at the very moment that the he was encouraging: he felt that the Grameen approach might not work decision to save is made. We call this project “Product 9.” in the more anonymous setting of the town, and he doubted the utility of MC: What do you see as the next challenge for the microfinance industry? savings, but he said I should try and see what happens. So in February 1985 I opened, for ActionAid, the first urban version of Grameen Bank SR: Right now, microfinance is in an exciting transition as fully-for- and began to observe and write about what happened. profit providers compete with or join forces with the nonprofits, which carried the microfinance flag for the first 30 years of its existence. This MC: What hurdles - and what failures - did you face? process has already proved disruptive and controversial - think of the SR: The main limitations were those of my own imagination and the debate about Mexican microlender Compartamos, for example - and failures those of my own making, especially not having the courage of will result in a restructuring of the industry in a way which cannot be my convictions. For example, my own studies of poor people’s behaviour precisely predicted. Once that is over, there will be a new surge of had already convinced me that savings was as important as credit in energy directed in new ways at old challenges: how to reach most poor their strategies, and that microenterprise investment, important as it was people instead of a small minority of them, how to move beyond for many poor people, was not the most pressing financial need for most microenterprise credit to general-purpose money-management and risk- of them, who need, above all, a way of transforming the tiny amounts management services, how to improve transparency and how to reduce that can be spared from small uncertain and unreliable incomes, into costs. !!! usefully large sums of money for the widest range of uses. But I failed to test these ideas in microfinance practice for more than a decade, and it Grassroots Capital manages the Gray Ghost Microfinance Fund and the Global was mid-1996 before I set up SafeSave, a provider of money- Microfinance Equity Fund.

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THANK YOU from the MicroCapital Monitor THE MICROFINANCE NEWSPAPER

The following organizations have supplied tremendous support to our efforts to maintain the candid coverage you have come to expect from us, your microfinance newspaper. Thank you for your readership!

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UPCOMING EVENTS Latin America - Caribbean Regional Microcredit Summit June 8 - June 10, 2009, Cartagena, Colombia Women's World Banking 7th Annual Capital Markets Conference This is the latest of the Microcredit Summit Campaign’s events for April 30 - May 1, 2009, New York, New York, USA those working to assist poor people in reaching financial self- This event will include panel discussions on the capital markets and a sufficiency. The fee to attend is USD 300, with discounts available competition between select microfinance institutions. The conference fee for those attending from the Latin American region. Add-on field is USD 500. For more details, visit http://www.swwb.org/node/711 or visits and courses are also available for an extra fee. Details are contact Magaly Arboleda at [email protected] or +1 212 768 8513. available via http://www.regionalmicrocreditsummit2009.org/, +1 202 637 9600 or [email protected]. Mobile Money Transfer (MMT) Africa Conference and Expo May 5 - May 6, 2009, Johannesburg, South Africa Developing Inclusive Financial Systems for the Poor: This event will cover topics such as money transfer as the first step How Funders Can Make a Difference toward a broader suite of mobile financial services, making mobile June 14 - June 18, 2009, Amman, Jordan money work in areas with low literacy and getting cash in and out of the This course is primarily designed for microfinance project managers and system. The base fee is USD 1699. Add-on events will be held on May 4 investment officers who make funding decisions. Course tuition is USD and May 7. For details, contact Paul Nickeas at + 44 (0) 20 7067 1835 1,800 for the first three days or USD 2,100 for the full five days, with a or [email protected] or visit http://www.mobile-money- discount of USD 100 for registrations prior to May 15. Details are transfer.com/africa/. available at http://www.cgap.org/direct/training/training.php/ or from Barbara Gähwiler at [email protected] or Chicago Microfinance Conference +1 202 473 9594. May 8, 2009, Chicago, Illinois, USA Registration fees for this conference, subtitled “Navigating the Markets: Microfinance Principles Microfinance in the New Economy,” begin at USD 45. More details July 3 - July 5, 2009, Bad Homburg, Germany may be found at http://www.chicagomicrofinance.com/ or by emailing Microfinance Institution Management [email protected]. No telephone number is offered. July 5 - July 10, 2009, Bad Homburg, Germany 2009 Pacific Northwest Microfinance Conference Commercial Micro Banking May 8 - May 9, 2009, Seattle, Washington, USA July 12 - July 17, 2009, Frankfurt am Main, Germany This event, hosted by Seattle Pacific University’s School of Business & The Micro Banking Summer Academy at the Frankfurt School of Economics, is targeted at microfinance professionals and educators. Finance & Management (Bankakademie) is hosting the above menu of Registration fees are USD 40 before May, with limited student discounts training opportunities. The registration deadline is April 24. More available. Details are available from John Terrill at +1 206 281 2502 or details are available via Maria Johansson at m.johansson@frankfurt- [email protected] or at http://spu.edu/DEPTS/SBE/se/microfinance/. school.de, +49 69 154008 617 or http://www.frankfurt- school.de/content/en/intern_advisory/summer_academies_2009/ Global Microfinance Congress micro_banking_summer_academy_2009.html. May 18 - May 20, 2009, New York, New York, USA This event will cover IPOs, exit strategies, case studies and the role of Microfinance: The Investment Opportunity venture capital in microfinance. MicroCapital readers may use service July 13 - July 14, 2009 in Washington, DC, USA code “SP2” to qualify for a discounted rate of USD 1095. More This event will cover topics including the role of intermediaries in a information is available via CustomerService@AmericanConference microfinance deal, ratings and investment strategies for pensions, .com, +1 212 352 3220 or http://microfinancecongress.com/. foundations and endowments. The registration fee for the conference is USD 1795, with add-on workshops and group discounts available. Twelfth Annual MFC Conference of Microfinance Institutions More information is available via Erin Busch at [email protected] May 25 - May 27, 2009, Belgrade, Serbia or +1 831 465 2294 or via http://www.frallc.com/ This event will cover topics such as client protection and weathering the conference.aspx?ccode=B722. recession. The payment of registration fees of USD 660 (USD 490 for MFC members) is requested by April 24, 2009. Details are available Pacific Microfinance Week 2009 from Marcin Rataj at +48 22 622 34 65, [email protected] or at July 13 - July 17, 2009, Nadi, Fiji http://www.mfc.org.pl/conference2009/. The Microfinance Pasifika alliance is organizing this series of events to raise awareness of microfinance and encourage cooperation in the Fourth Annual Underbanked Financial Services Forum Pacific region. Registration is free of charge, but there is a deadline of June 1 - June 3, 2009, Dallas, Texas, USA April 30. Microfinance Pasifika network members may apply for a travel The Center for Financial Services Innovation and SourceMedia present subsidy. Additional information is available via +679 3544305, this event featuring 50 speakers from the banking, regulatory, nonprofit, [email protected] or http://www.microfinance- credit union and private equity sectors. Registration fees range from pasifika.org/. USD 695 to USD 1495, but will increase May 1. More details are available via [email protected], +1 212 803 6093 or Asia Insurance Review Microinsurance Conference http://www.sourcemediaconferences.com/CFSI09/reginfo.html. July 22 - July 23, 2009, China More details on this conference, including its location, are expected First European Research Conference on Microfinance shortly. Requests for updates on the event may be made at http://www. June 2 - June 4, 2009, Brussels, Belgium asiainsurancereview.com/pages/conference_details.asp?id=124/. The This event aims to provide researchers with an opportunity to present contact person is May Low, who may be reached at +65 63723185 or their work and exchange ideas. The registration fee is EUR 200 until [email protected]. !!! April 30, with discounts available. For details, contact Petra Solli at [email protected] or +32 2 650 6601 or visit http://microfinconf.eu/.

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PAPER WRAP-UPS 57 percent of the MFIs studied are profitable. The larger the loans, the less money spent by Profitable MFIs tend to be larger, serving 87 the institution per dollar. Whereas the median Microfinance Meets the Market percent of total customers. 73 percent of microfinance bank spends 12 cents on banks are profitable, compared with 54 operating costs per dollar loaned, the median By Robert Cull, Asli Demirgüç-Kunt and Jonathan percent of NGOs. Profit-making NGOs NGO spends 26 cents. Morduch, published by the World Bank Development perform more like subsidy-dependent NGOs Research Group, May 2008, 40 pages, available at: than commercial banks in that they serve Question 6: Are profits high enough to attract http://www-wds.worldbank.org/servlet/ more borrowers overall, poorer households profit-maximizing investors? WDSContentServer/WDSP/IB/2008/05/27/ and more women. 000158349_20080527095250/Rendered/PDF/ The average return on equity for NGOs is 3 wps4630.pdf Nonprofits have succeeded in becoming percent; for microfinance banks it is 10 percent. The data at the top end shows This paper explores the tensions and profitable largely from the support of social investors, which invested USD 4 billion in promise for attracting market-oriented opportunities of the microfinance industry as investors, however evidence suggests that it shifts (or does not shift) towards microfinance during 2007. Social investors, which include international financial investors seeking to maximize profits would commercialization. It outlines the evolution of have little interest in most of the MFIs serving microfinance to its current state, exploring a institutions and mutual funds, usually expect minimal returns - effectively providing a the poorer customers: “It is one thing to earn series of questions that touch on issues of profits, and quite another to earn profits that subsidy, profit and social impact. subsidy equal to the difference between their returns and that which market sources would are high enough to attract investors who have The authors employ data from the demand. (MIX has adjusted its data to no concern with social missions.” Microfinance Information Exchange that account for this implicit subsidy.) For the Question 7: How important are subsidies? covers 346 microfinance institutions (MFIs) industry to continue its rate of expansion, that serve a combined 18 million active MFIs will need to maintain access to these Subsidy per borrower is USD 233 for the borrowers and hold gross assets of USD 25.3 subsidized funds, which are partly dependent median NGO in the sample group and billion. (All figures provided in the paper are on the ability of MFIs to prove their social reaches USD 659 for those at the seventy-fifth in purchasing power parity-adjusted dollars.) value. percentile. The median microfinance bank, on the other hand, receives no subsidy. Question 1: Who are the lenders? Question 3: Are loans in fact repaid at the high rates advertized? Question 8: How robust are the financial The paper focuses on three types of MFIs that data? make up the majority of the sample: The portfolio at risk over 30 days is a strong nongovernmental organizations (NGOs), non- two to four percent for both group and The MIX data, as described earlier, has been bank financial institutions (NBFIs) and individual lending. adjusted to account for hidden subsidies, microfinance banks. NGOs make up 45 including those involved in socially motivated percent of the sample group. NBFIs, which Question 4: Who are the customers? investments. This is a difficult adjustment to make up 30 percent of the group, include Banks lend in greater volume than NGOs. If make, and the authors concede that it is open MFIs that have special government loan size is taken as a proxy for poverty level to error. They also stress that there is no way concessions allowing them to assume of customers, microfinance banks serve of adjusting for the fact that institutions would additional roles beyond providing credit, such customers who are better off than the likely shift strategies to become more efficient as taking deposits. For-profit microfinance customers of NGOs. Banks will thus have an if their access to subsidies were to dry up. banks make up just 10 percent of the sample. easier time making profit assuming that the In conclusion, this paper indicates that the Although microfinance banks make up only costs to extend loans (screening, monitoring profile of microfinance banks is significantly 10 percent of the group, they account for over and processing) are fixed. Although, “Debate different from that of nonprofit MFIs. NGOs half of gross assets. NGOs account for 45 persists on the extent to which a trade-off tend to have higher operating costs than percent of the organizations, but have 21 exists between pursuing profit and reaching banks, and the authors pose the question of percent of the assets. Of the USD 2.6 billion the poorest customers.” The authors conclude whether this is due to smaller average loan in subsidized funds, NGOs take a that, “The data here suggests that this trade- sizes driving up costs, to working with disproportionate share. NGOs generally reach off is very real.” particularly hard-to-reach households or to a higher proportion of women, claiming 75 Question 5: Why are interest rates so high? subsidies breeding inefficiency. percent of total female borrowers. Banks claim The authors state that without data on social 25 percent of the total borrowers, but only six NGOs facing high costs often respond by and economic benefits, the paper cannot add percent of women borrowers. Despite the raising interest rates. At the median, NGOs to the debate on whether subsidies to push toward commercialization, NGOs still charge borrowers 25 percent interest per year, microfinance enhance social impact. The maintain significant market share, although with the top quartile charging 37 percent or authors argue that, “Commercial investment the authors expect this share to decline as more. Microfinance banks, on the other hand, is necessary to fund the continued expansion private sector banks increase in size. charge just over 13 percent interest at the median and 19+ percent for the top quartile. of microfinance, but institutions with strong Question 2: How widespread is profitability? While scale does appear to be one route to social missions, many taking advantage of cost reduction, economies of scale disappear subsidies, remain best placed to reach and Earning profit is not restricted to for-profit serve the poorest customers and some are organizations. Most organizations in the over about 2000 customers. Above that level, cost reductions are often made by serving doing so on a massive scale. The market is a sample with revenues exceeding cost have powerful force, but it cannot fill all gaps.” nonprofit status. The authors stress that, “the customers with larger loans and more microfinance industry’s drive towards services. profitability does not necessarily imply a drive toward ‘commercialization.’” This report available by SUBSCRIPTION ONLY: Support this emerging industry by subscribing and advertising via www.MicroCapital.org Page 13 MICROCAPITAL MONITOR | MICROCAPITAL.ORG APRIL 2009 | VOLUME.4 ISSUE.4

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2008 Microscope on the Microfinance Guatemala Honduras Business Environment in Central America Guatemala ranks seventh, with a score of 54. Honduras ranked twelfth with a score of 47.1. Published by the Economist Intelligence Unit, October Approximately 35 NGOs operate in the NGOs offer only microcredit, with limited 2008, 62 pages, available at: http://a330.g.akamai country, and those that only receive private insurance offerings. The main industry .net/7/330/25828/20081014142739/ capital are not subject to supervision by fiscal regulator is the National Commission for graphics.eiu.com/marketing/microfinance/ authorities. It takes no more than USD 650 to Banks and Insurance Companies. register as an NGO. Banks’ specialized English_Microscope%202008.pdf Banks and finance companies are beginning microfinance units and cooperatives/credit to enter the microfinance industry as NOTE: While this report outlines the business unions are the main regulated institutions competition from state institutions is very environment for microfinance across Latin engaged in microfinance. Regulated limited. America and the Caribbean, this summary is institutions require a capital adequacy ratio of limited to Central America. Rankings are out 10 percent, which the authors consider Regulated MFIs such as the Financial Private of the full sampling of twenty countries. reasonable. Development Organization (OPDS) are non- bank financial institutions. Regulated Commissioned by the Inter-American G&T Continental has the largest market institutions, unlike finance companies, face Development Bank and the Corporacion share, with Banco de Desarollo Rural and interest rate caps and cannot hold savings Andina de Fomento (CAF), this report covers Genesis EMP following. three areas: regulatory framework, investment from the general public. The country has minimal regulatory and climate and institutional development. The Non-regulated institutions have limited access examination capacity with regards to general indicator scores are aggregated to produce an to public funding and are mostly restricted to financial sector supervision and regulation. In overall score ranging from 0 to 100 (100 is the microcredit. highest). addition, it is very difficult to convert NGO MFIs to regulated status. Costa Rica El Salvador Mexico Costa Rica ranks fifteenth overall, with a score El Salvador is ranked fourth out of twenty in of 40.3. Its key strength stemmed from the Mexico ranks tenth with a score of 47.5. Latin America and the Caribbean and is the robust economic expansion of 2006 and 2007. Mexico is moving towards international highest ranked country in Central America During those years, Costa Rica experienced accounting standards, although standards still with an overall score of 59.0. There are no strong growth in banking credit, which was vary widely based on institution size and legal or regulatory restrictions on establishing perpetuated by the economic boom coupled regulatory and juridical status. MFI networks or operating NGOs. The market for with falling domestic interest rates. microfinance institution (MFI) creation is are currently developing standardized competitive, with no provider dominating the accounting practices for MFIs. Accounting standards and MFI transparency are solid. While non-regulated institutions do current environment. Regulated and non- On one hand, regulations for savings and not face external audits or ratings, regulated regulated institutions use separate private credit entities (EACPs) have been adjusted to institutions are required to attain both. A large credit bureaus and serve the majority of the accommodate microfinance activities such as majority of NGOs reporting to the adult population. “the capacity to carry out personal visits to Microfinance Information Exchange are not asset creditworthiness (and to consult a credit Nicaragua rated. bureau).” However, the National Commission Although Nicaragua ranks sixth with a score of Banks and Securities generally lacks Regulatory and examination capacities could of 58, its investment climate is ranked in the sufficient specialized staff to create effective be improved. Also, commercial and consumer bottom half of the index at 44.2. regulations and perform field visits to MFIs. loans are mixed together in microfinance portfolios as, “Institutions are not required to The Banking Superintendence has been Commercial banks have shown minimal monitor the final destination of borrowed encouraging domestic banks to adopt US best- interest in “downscaling” into microfinance, resources.” practice accounting rules regarding asset partially due to strict prudential standards. valuation/loan origination and provisioning. NGOs do not face significant roadblocks to Panama A Simple Poverty Scorecard for Vietnam forming MFIs. Another key strength is the Panama is ranked tenth, with its investment country’s wide range of MFI services. climate ranked third. A new banking law was By Shiyuan Chen and Mark Schreiner, March 2009, 160 pages, available at: http://microfinance.com/ Nicaragua’s two largest regulated institutions, enacted in August 2008 that, “considers micro English/Papers/Scoring_Poverty_Vietnam_EN.pdf Banco Pro Credit Nicaragua and Financiera and small enterprises to be banking clients if Nicaraguense de Desarrollo SA, are larger they receive credit for commercial purposes This study uses a 2006 Vietnamese Household than the combined portfolio of all NGOs. The up to a total of 200,000 balboas [USD Living Standards Survey to construct a country is also considered be among “the five 200,000].” This allows banks to provide scorecard that estimates the likelihood that a most competitive microfinance markets in the microloans. household has expenditures below a given LAC region.” Although public institutions do not compete poverty line. The scorecard uses ten indicators that field workers collect and verify. Poverty On the negative side, the country scored unduly with private MFIs, a key challenge is a scores can be computed on paper in the field poorly on its judicial system, due to limited lack of thorough understanding of microcredit in ten minutes. The scorecard’s accuracy and property protection rights. Most importantly, by regulators. precision are reported for a range of poverty its capital markets infrastructure is Only a few NGO MFIs exist in Panama due lines. The poverty scorecard can be used to undeveloped, which increases borrowing costs to difficulties in raising capital. monitor poverty rates, track changes in for customers. The country has also poverty rates over time and target services. experienced a significant number of bank collapses in the last few years.

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Due Diligence Guidelines for the Review of Microcredit Loan Portfolios: SUBSCRIBE TO THE MICROCAPITAL MONITOR A Tiered Approach Issues of the MicroCapital Monitor are available only by subscription. Subscribe today to support a representative voice for micro-bankers and microcapital investors by visiting MicroCapital.org or By Robert Peck Christen, published by CGAP (Consultative Group to Assist the Poor), July calling us at +1 617 648 0043. All subscriptions include twelve monthly issues access to all 2005, 39 pages, available at: http://www. back issues. Rates are as follows: microfinancegateway.org/files/ 26200_file_26200.pdf Bronze: USD 149 per year - Sent to one email address Silver: USD 299 per year - Emailed to three people at an organization The paper presents a due diligence tool for Gold: USD 699 per year - Customized, organization-wide access regulators, grantors and investors to evaluate Discount: USD 99 per year - Available only OUTSIDE rich countries the accuracy of a microfinance institution’s (MFI) reported portfolio quality and the greater loan losses relative to the amounts and involves both a desk review and an onsite extent to which an MFI employs sound loan outstanding than intermediaries that operate discussion with senior management covering management practices. Investment in MFIs other types of portfolios secured with the country’s investment climate and the can be risky, and external audits often fail to collateral.” MFI’s loan portfolio, methodology and accurately identify the primary risk facing management. investors - misrepresentation of portfolio The Loan Portfolio Review Tool is a three- quality - because they depend on the assumed tier due diligence process, with each tier A Tier II evaluation involves up to five days of veracity of an MFI’s management information digging progressively deeper into an MFI’s review at the branch level to assess whether system. The author argues that MFIs suffer lending policies, loan administration and what was presented at the head office is from three potentially fatal weaknesses: “[1] credit-risk control procedures. The tool aims consistent with what is happening in the field. Basic governance of MFIs is weak…. Given to verify: the accuracy of accounting and loan Tier II is recommended for those considering that the profit motive is not predominant in tracking systems; that policies exists for loan sizeable grants or investments in an MFI. most cases, boards of directors…may fail to provisioning; that measures for recovering and act aggressively to rein in their managers. [2] writing off bad loans are in place; that A Tier III evaluation takes up to four weeks Potential exists for rapid deterioration of measures are in place to prevent fraud; and onsite with a team of local auditors, plus two portfolio quality…. Loan delinquency…can that the MFI is not managing its loan portfolio weeks of off-site analysis. Tier III aims to increase rapidly when management in a risky manner. quantify asset quality through statistical deteriorates. [3] Most microloans are sampling. It is recommended when MFIs are unsecured…. Thus, when loan portfolio Recommended for entities making small wishing to access capital market funding quality suffers substantially, MFIs face far grants, a Tier I review takes about two days mechanisms. !!!

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